Wednesday, January 28, 2009

OK. This has been building up, and a return to blogging by discussing the finer points of economic stimulus may be the equivalent of asking you guys to do a triple gainer into a wading pool, but I can't help myself.

Coming back from politics cold turkey was too difficult, so I'm kinda combining my (perverse) interest in economics and politics into a rant/educational opportunity. See, there are two main schools of economic thought running through academia these days and while they don't map ENTIRELY to the political parties, you don't find a lot of laissez faire Milton Friedman-wannabe clones floating around Democratic circles and you don't tend to find the John Kenneth Galbraith types lurking in the foliage at a Republican party ("Where white goes to make real dancers cry.")

So what an old (and from my point of view idiotic) macro professor told me is true...there is "Chicago School" and "Berkley School" econ...the Freshwater/Classical/Real Business Cycle and Saltwater/Keynesian versions of macroeconomics (Though there's been enough idea bleed...neither side has a monopoly on good insights...that to call them formal Classicals and Keynsians would be inaccurate, I'm going to use the two terms to ID the sides). The key characteristic of Classicals is math. Lots of math. The two groups in academia that a Classical would admit to looking up to are mathematicans and physicists. Classicists might (MIGHT) admit that the hypothetical "rational actor" doesn't really exist, but immediately move on to claim that either a) it doesn't matter or b) in the aggregate the sum of actors are rational. Keynesians are a touch more pragmantic and more inclined to look at disciplines such as behavioral economics for insights (rather than as punching bags).And those two schools are having a bitchslap contest. The Classicals have had their way with the economy for nigh on 20 years now, and the Keynesians are pointing out that the track record has some problems. In fact, in my admittedly somewhat partial opinion, Classicals (and their blog offspring like Megan McArdle) are beginning to twist themselves into interesting little knots in an attempt to reconcile their a priori not to be questioned assumptions and that annoying little interlocutor, the real world. In this way (he said puckishly, knowing what it would do to them if they read it) they more than slightly resemble the Marxian economists that I studied in undergraduate, desperately using more and more elaborate maths and assumption to prove that their desired conclusions are correct.

First, while you might have more trouble getting a Classical to admit it than a Keynesian, BOTH sides would actually find the proposition that "The government should act like a business/family and live within its means," to be a foolish statement. There's a reason that Micro- and Macroeconomics are divided. For governments, for the banking systems that support a modern economy, the rules are NOT the same as you or I can or should follow. It is NOT straightforward and simple...there are aspects beyond simple accounting rules...paying A $500 and A paying that $500 to B and B paying $500 to C is NOT the same as paying A $500 and A spending it. There are advantages to an economy for the velocity of money use to be high that are not found in simple microeconomic scenarios. In fact in this case, that scenario is FOUR TIMES as good for the economy.

All this by way of saying that there are two theories about stimulating the economy...monetary stimulus and fiscal stimulus. Classicists prefer monetary and Keynesians (traditionally) prefer fiscal. In practice both Classicals and Keynesians state that in normal times monetary stimulus works better. (Friedman received his Nobel for his work on monetary stimulus and even Keynesians today acknowledge that his insights were valuable). That is why, these days, there are a TON of quotes from guys like Krugman stating that under normal circumstances, monetary stimulus is preferable.

Where they differ is in times like these. I'm about to use the D-word, so brace yourselves. Krugman's book The Return Of Depression Economics argues that there comes a tipping point in a recession where traditional monetary stimulus has shot its wad. Lately he's been strongly arguing that when the Fed Rate has reached the zero lower bound, you're probably there. He's also been saying that monetary stimulus is useless in the Liquidity Trap. What the Freshwater types have been reduced to is arguing that their unknown efficacy "non-traditional" monetary stimulus is better than non-traditional fiscal stimulus or that maybe doing nothing is a better option and arguing that if we are in a liquidity trap (and given the behavior of banks these days it takes some major chutzpah to claim otherwise) it will be shortlived rather than lasting, say, a decade.In short, a lot of what you hear these days regarding stimulus is inspired as much by a desire to have things a certain way politically, or to beat back a nagging feeling that all that time spent studying integral, tensors and matrix algebra may NOT have been necessary as it is inspired by actual analysis. All social sciences suffer from a lack of controlled experimentation. Only economics exerts THIS much influence on policy. That may not be a good thing, but you go into a social crisis with the academic disciplines you have, not the academic disciplines you wish to have, or might have in the future... Just keep that in mind when you read the news these days.

About Me

The Pedant is a former military officer and business school grad who took one too many shots to the head and wound up a left of center rant artist. His hobbies are politics, books, video games, video games, and getting pasty faced from all the video games. Did I mention a video game habit?